TD Special Situations Coverage Update
Introducing 2024 Estimates and Updating Target Prices
We are introducing our F2024 estimates and updating our target prices for several names in our Special Situations coverage universe. Our target-price changes primarily reflect: (1) the rolling forward of target-price calculations to be based on F2024 EBITDA (versus F2023 previously) and (2) fine-tuning of target-price multiples and estimates, reflecting company- and industry-specific factors. Exhibit 4 illustrates the changes in our target prices and valuation multiples. In addition, we have made minor changes to our 2022/2023 forecasts for several names (see Exhibit 5). We have not made any rating changes in this note. YTD in 2022, share prices of the companies in our coverage universe have decreased 8.8% on average, with only five of the 13 companies posting positive returns (see Exhibit 2). We would highlight that a significant proportion of the decline in share prices reflects multiple contraction (see Exhibit 3).
Our 2023 Sector Outlook: Our Special Situations coverage encompasses a wide range of industries, products/services, end-market customers, and fundamental drivers. Our views for 2023 reflect the current uncertain macro picture and rising yield environment, with potential for interest rates to remain "higher-for-longer', and result in a more pronounced impact on consumer demand and business investment than is currently forecast. Additionally, although we are encouraged by early signs of improving raw-material availability, slowing inflation, and easing of global logistics bottlenecks, we still anticipate these factors being a nagging issue in 2023 and potentially creating quarterly earnings volatility.
In this context, we believe a continued defensive focus is appropriate, particularly in H1/23. Our preference is for established, recession-resilient industries, and "self- help" companies with low leverage and strong FCF generation, providing the ability to act opportunistically on acquisitions and/or share repurchases and invest in organic growth, despite a potentially weaker macro backdrop. In our view, UNS- T, BYD-T, CCL.B-T, and FSV-T screen well on these criteria. For patient, long- term-focused investors, we believe the current environment has presented an attractive entry point across the smaller-cap, growth-by-acquisition stories; investor appetite for the roll-up model has waned, given the rising cost of capital and with investors focused on maintaining liquidity. We believe DNTL-T, PLC-T, and SPB-T are attractive at current valuations and will reward investors over time (or sooner as potential takeover targets). We continue to view CIGI-N as a core holding, despite the near-term headwinds being faced by its traditional brokerage services, given that it has multiple growth engines and a growing mix of recurring revenues (underpinned by investment management, engineering services and project/property management), which we anticipate will allow it to drive much better- than-feared results. Furthermore, management has a demonstrated track-record of compounding value through cycles.
Our top picks for 2023 include UNS-T, BYD-T, and CIGI-T.